Question

Answer the following questions with short paragraphs. Use economic reasoning to defend it. Make sure to answer all parts!

What information does an increase or decrease in market prices convey about scarcity? How does this relate to our understanding of economic efficiency?

Answer 1

If there is an increase in the price of a good that means people in the market are valuing the goods more than before, it signals the producers to invest more on the goods and increase the production and reap larger benefits, it also means that if the producer are not producing this goods then there will be a shortage in the market and that wil lead to inefficiency. Similarly, if the price of the goods in the market are decreasing then it means that consumers are valuing the goods less than before, and producers will reduce the production of the goods or their resources will go to waste and create a surplus.